The conflict between Ukraine and Russia is intensifying ahead of Sunday’s Crimea vote

An already tense situation in Ukraine grew more menacing on Saturday, after Russia’s foreign ministry saying it was considering calls to protect Russian-speaking civilians and Ukraine accused Russian forces of making an incursion outside of Crimea a day before a controversial referendum on the region’s fate.

A move by Russia to grab Russian-speaking portions of eastern and southern Ukraine would mark a huge and likely market-rattling escalation of the standoff. According to news reports, Ukrainian officials charged that around 80 Russian troops had taken landed in an area near Crimea and demanded an immediate withdrawal.

Earlier, Russia’s foreign ministry issued a statement saying there had been “”numerous calls on Russia to protect peaceful civilians. These appeals will be considered,” according to The Wall Street Journal.
Meanwhile, in the least surprising development of the day, Moscow used its veto to kill a U.N. Security Council resolution that would have declared illegal Sunday’s referendum on whether Ukraine’s Crimea region should secede and join Russia.

Clashes took place in the eastern Ukraine city of Kharkiv overnight Friday, with two people killed and five injured as gunshots were fired, reports said. Rival groups of protesters blamed each other.

The U.S., European Union and Ukraine contend the vote is illegal and have threatened to impose sanctions on Russia. The referendum is widely expected to result in Russia reabsorbing the region, though observers note that the ballot doesn’t offer the prospect of the region maintaining its current status within Ukraine. Instead, it asks voters whether they would like to join Russia or restore the 1992 Crimean constitution, which would see the region effectively declared independent.

A vote to rejoin Russia followed by a round of anti-Moscow sanctions are viewed as a foregone conclusion. The bigger fear for now is that Russia could move militarily to take control of areas of eastern Ukraine under the pretext of protecting Russian-speaking citizens. Those fears were underlined Friday when Russia’s foreign ministry said the country “recognizes its responsibility for the lives of countrymen and fellow citizens in Ukraine and reserves the right to take people under its protection”. The statement came after battle between protesters in the eastern Ukraine city of Donetsk on Friday.

U.S. equities and global markets were rattled a bit in the run-up to the vote, but investors appear to have largely factored in a scenario in which Crimea is reabsorbed into Russia with Moscow willing to pay the price of sanctions. Read: What Sunday’s Crimea vote means for markets.

The wild cards remain whether Russian President Vladimir Putin attempts to make a broader grab for Russian-speaking areas or if the West responds with broader sanctions than are currently ancticipated.

Alastair Newton, Nomura’s senior political analyst, told MarketWatch via email he expects sanctions to be relatively mild, particularly since Germany still appears to see dialogue with Moscow as the best way of deterring Putin from taking bigger steps and due to the fact “firing all the shots in one’s locker now” could encourage Putin to judge he has nothing to lose by attempting to seize eastern Ukraine.

The worst-case scenario would indeed be a grab for eastern Ukraine. “In that event, I see a non-negligible probability that the West would impose banking-sector sanctions, the prospect of which is likely to have a significant impact on market sentiment,” including pushing Brent crude oil north again, Newton said.

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